Network hardware, a sector that has benefited as much as any from the recent tech rally, continued to be hotly debated Tuesday as analysts took divergent views on two Internet gear names. Among the skeptics is Wachovia, which downgraded Juniper ( JNPR) to underperform from market perform, citing channel checks showing weakening demand in Asia and Europe. Meanwhile, J.P. Morgan was positive on Ciena ( CIEN), saying chances for revenue growth are improving over the next two to four quarters. Regarding Juniper, Wachovia noted that the company remains one of the most leveraged to international sales in the sector, a trend that bodes poorly for the second quarter. "In China we're hearing that SARS has delayed project planning and spending as many workers at the major telecom service providers, including China Netcom and China Telecom, worked from home at the height of the crisis." "In Europe, national service providers in the five largest countries (where Juniper has significant exposure) spent only an average of 16% of their budgets in the first quarter of 2003," Wachovia wrote. "Recent conversations with major service providers in the region indicate the deficit is unlikely to be made up, so we should expect further spending cuts for the full year."
At its close of $12.59 Monday, Juniper has close to doubled this year. In recent Instinet trading, the shares were down 29 cents, or 2.3%, to $12.30. Ciena, a stock that has benefited far less than its peers from the recent run-up, could see upside as clarity emerges about its revenue outlook, J.P. Morgan said. "While we still believe Ciena's cost structure is too high, higher topline growth would require smaller changes in the cost structure to bring us closer to EPS breakeven down the road," it wrote. The brokerage said its checks indicate British Telecom is "likely a larger long-term customer than originally anticipated;" that a contract with Verizon ( VZ) complements one with SBC ( SBC); and that additional opportunities exist with Telmex and AT&T ( T). "While we are not predicting an optical market comeback, we are growing increasingly positive on Ciena's ability to execute on the topline given the limited opportunities in the optical market," J.P. Morgan wrote. Ciena closed Monday at $4.96, up just 16 cents from the market nadir on March 13. The shares are also down about 69 cents on the year, but cost about twice as much as they did in early October 2002. In recent Instinet trading, Ciena was up 25 cents, or 5%, to $5.21.